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Put on hold but not abandoned

Owing to the COVID-19 pandemic, the transaction volume in Cologne’s commercial real estate market dropped to EUR 1.7 billion in 2020, which corresponds to a decrease of about 45 percent compared to the year before. Greif & Contzen reports that the sale of a number of large properties has merely been put on hold, rather than abandoned. Real estate in Cologne continues to be sought after among investors, and the market is expected to gain momentum as soon as the end of the pandemic becomes foreseeable.

The COVID-19 pandemic has left its mark, also on Cologne’s property investment market: At the end of 2020, the real estate experts of Greif & Contzen recorded a decline by 42 percent compared to the year before. A decrease from a transaction volume of 3.1 billion euros down to around 1.7 billion euros: that does sound like a huge drop. “However, 2019 was a record year. Compared to the average value of the past five years, there has been a relatively moderate decrease of about 24 percent,” says Thorsten Neugebauer, Head of Investment at Greif & Contzen Immobilienmakler GmbH. Even more importantly: “The sale of a number of large properties has been put on hold but not been abandoned,” Neugebauer points out and continues to explain: “The first lockdown in March happened at a time when institutional investors normally set the course for their transaction activities in the business year ahead. Nobody knew at the time how the pandemic would develop, how long it would take, and what exactly we were even up against.” These uncertainties caused a downward trend not only in the stock markets but in the real estate markets, too. Those who had been planning to invest into real estate were forced to think about the future development of the letting market, whether commercial tenants would remain able to pay their rent, and whether rents and sales prices would decline.

As a reaction to these uncertainties, many market participants decided to wait and to postpone transactions wherever possible. The deferral period turned out to be much longer than originally expected. After all, the pandemic still has a huge impact on public and private life, as the second rigorous lockdown continues, and despite the recent good news regarding vaccines. Transaction activities had picked up again over the summer, but since early November, investors have been putting their decisions on hold once more.

Retail and hotel properties under pressure
Prevailing uncertainties and the effects of the lockdown are particularly noticeable in the area of retail property transactions, owing to concerns regarding price reductions due to rent losses. The shops hit hardest within the retail industry, are those that had already been affected by the general crisis in inner city retailing caused by changing consumer behaviour and the increase of online retailing. This trend was greatly accelerated by the COVID-19 pandemic. Hotel properties are also under pressure, as this industry is particularly affected by the coronavirus-related restrictions, which has given rise to a considerable decrease in demand.

Strong demand for office and logistics properties
Office and logistics properties, on the other hand, are still in high demand among investors. With a total investment volume of around 900 million euros, office buildings were the strongest asset class once again, despite the postponement of sales mentioned above giving rise to a decrease in turnover of almost 60 percent, compared to the record-breaking year of 2019. Nevertheless, a number of large-scale transactions were concluded in Cologne in 2020. Private investors sold office buildings on Schanzenstrasse worth over EUR 90 million to the Cologne-based investment company Jamestown, who bought the building complex together with two other institutional investors from Germany. A portfolio of office buildings on Neumarkt 35-37 and Siegburger Strasse 229c also changed hands for an estimated price of over EUR 90 million. It was acquired by a fund by Tristan Capital that is based in Britain. The property developers Stefan Frey AG and Convalor sold the office development “Ehrenwert” on the corner of Grüner Weg and Vogelsanger Strasse in Cologne-Ehrenfeld to the asset and fund management company Arminius Group for an estimated EUR 75 million. A respectable result of around EUR 120 million was achieved in the generally rather small asset class of industrial and logistics properties in 2020, thanks to multiple sales across all size categories. “A closer look at the largest transactions of the past year shows that investors continue to focus on Cologne’s market, including those from abroad: There have been buyers from the UK, Singapore and France,” says Thorsten Neugebauer. The property expert expects that interest in real estate in the Cologne region will remain strong. “A general pressure to invest persists, due to the expansive monetary policy. Office and logistics properties in excellent locations are still considered attractive investment objects, and there were even some price increases in this year shaped by the corona crisis,” Neugebauer points out. Over the course of the year, the prime yield for office properties decreased by another 0.1 percent points to now 3.0 percent. The prime yield for logistics properties declined by 0.3 percent points to now 3.8 percent, while the prime yield for retail buildings increased for the first time in many years, and it now stands at around 3.0 percent. Potential buyers were generally slightly more critical when reviewing value-add properties and those in secondary locations, in particular with regard to financing. On the whole it can be said, however, that Cologne continues to be a popular investment location, thanks to its diverse economic structure and the size of its property market.

Positive outlook for the year ahead
Greif & Contzen’s researchers are optimistic in their forecast for the months ahead. The fact that transactions concerning development land accounted for a larger share in 2020 than had been the case in previous years, suggests that property developers and investors have positive medium-term expectations for Cologne. “We are looking ahead with confidence and we expect that the investment volume generated with commercial properties will be slightly higher once again,” states Thorsten Neugebauer.

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